Securing Over $50 Billion In Contracts Will Enhance Future Predictability And Efficiency

Key Takeaways

• Securing substantial contract awards and reducing COVID-era contract impacts could stabilize and improve profit margins and earnings.
  
• Strategic cost reduction and workforce expansion efforts aim to enhance shipbuilding throughput and drive revenue and margin growth.
  
• High attrition rates, contract delays, and supply chain challenges, alongside inflation and operational issues, threaten production, revenue, and margin growth.

Catalysts

Designs, builds, overhauls, and repairs military ships in the United States.

• HII expects to secure over $50 billion of contract awards over the next 24 months, improving predictability in cost and schedules and potentially increasing profit margins back to historical norms. This could positively impact revenues and earnings.
  
• The company is achieving milestones on ships contracted prior to COVID, and as these contracts become a smaller part of the portfolio, this could reduce the drag on financial results, potentially improving net margins and earnings.
  
• HII is focused on increasing throughput and reducing costs through an enterprise-wide cost reduction target of $250 million per year, which is expected to improve operational execution and positively affect net margins.
  
• The acquisition of advanced metal fabricator assets and workforce strategies, like increasing employment and outsourcing 30% by 2025, are expected to improve shipbuilding production throughput by 20% year-over-year, potentially boosting earnings.
  
• Demand for products and services is strong, with a target to grow annual revenue to $15 billion by 2030 and achieve margin expansion, which would enhance free cash flow and overall financial performance.

Huntington Ingalls Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Huntington Ingalls Industries's revenue will grow by 4.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.8% today to 5.3% in 3 years time.
• Analysts expect earnings to reach $698.6 million (and earnings per share of $18.7) by about March 2028, up from $550.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.3x on those 2028 earnings, down from 14.9x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 32.2x.
• Analysts expect the number of shares outstanding to decline by 0.77% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.15%, as per the Simply Wall St company report.

Huntington Ingalls Industries Future Earnings Per Share Growth

Risks

• The company is experiencing high attrition rates despite exceeding hiring goals, leading to instability and potential workforce shortages, which could impact production throughput and consequently affect revenue and earnings.
  
• Pre-COVID contracts are still a significant portion of revenue, causing a drag on financial results; delays in transitioning fully to post-COVID contracts could limit margin expansion and affect earnings growth.
  
• Delays and uncertainties in contract negotiations, particularly for submarine contracts, could affect cash flow projections and create financial instability that might impact earnings.
  
• Supply chain challenges, including less efficient performance due to inflation and potential quality control issues with increased outsourcing, could affect production schedules and cost predictability, impacting net margins and earnings.
  
• Operational execution issues, such as unfavorable contract adjustments and underperformance in key programs like the Virginia-class submarines, could jeopardize margin improvement targets and lead to lower-than-expected earnings.

Valuation

• The analysts have a consensus price target of $198.343 for Huntington Ingalls Industries based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $312.0, and the most bearish reporting a price target of just $145.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $13.1 billion, earnings will come to $698.6 million, and it would be trading on a PE ratio of 13.3x, assuming you use a discount rate of 7.1%.
• Given the current share price of $208.57, the analyst price target of $198.34 is 5.2% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.